Profit Margin Tax Scheme [Used Car Sales]

Profit margin tax is a value added tax (VAT) scheme created by the FTA for the benefit of the used goods industry.

The scheme allows VAT to be applied only to the profit portion of the goods sold, provided full VAT has been charged on the goods previously (and not claimed back).

Working Example

Ahmed buys a brand new car from a dealer in Dubai. He pays AED 100,000 plus 5% VAT. Regardless of how he purchases the car i.e full cash or on finance VAT of 5% has been paid on the total value of the car. Now since he is a consumer and not a VAT registered business he will NOT be able to claim the VAT back.

6 months later Ahmed decides to sell the Car to Khaled (a used car dealer) based in Dubai. After agreeing on the price of AED 80,000 Khaled pays Ahmed in cash. Ahmed then sells the car through his showroom for a price of AED 85,000.

Lets calculate his VAT liability

Purchase Price AED 80,000
Selling Price AED 85,000
Profit AED 5,000
VAT Liability (5% of AED 5,000) AED 250

Common Mistakes

  1. Deducting expenses before calculating the Profit; there is no provision in any FTA publications that allows for the deduction of expenses on the used car before calculating the Profit element on which the VAT is applied. Therefore you cannot deduct car polishing, car repairs, and other expenses before calculating the Profit on which VAT is applicable.
  2. Charging Profit Margin Tax to used cars 2017 or earlier; Profit Margin Scheme can only be used for cars where the FULL VAT has been previously applied, therefore since cars previous to 2017 or earlier have not had the full vat applied it is not possible to apply the Profit Margin Scheme to these cars.

NOTE: Profit Margin Tax  can still be applied to cars 2017 or earlier but only if the full vat was applied by a used car dealer in the chain of events.

To learn more about the FTA and read their publications please visit: Ministry of Finance (click here)

Profits Tax Consultants are a British Accounting and Tax Consultancy in Dubai. We look after many used car dealers and offer digital software to help you manage your used car showroom. Contact Ali Afzal on 0585442030 to arrange a free consultation or contact us here (click here)